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The Cheesecake Factory – Delicious Again Following a Pullback

June 22, 2010 | About:
Casual dining stocks had a big run from the ‘depression mentality’ lows of March 2009 through April of this year as investors realized that business was picking up again. I was a big buyer of CAKE near the lows but sold out earlier this year when the shares approached $30.





Today CAKE closed at $23.83 – off 22.5% from its recent $30.75 high. Year-over-year comparisons turned positive last September with $0.27 versus $0.19. December was $0.26 against $0.13 and March was a similarly good $0.31 v. $0.17.


Full year 2010 – 2011 consensus estimates are now running $1.35 and $1.58 respectively up from $0.97 in 2009. That puts CAKE’s P/E at about 17.7x this year’s and 15.1x 2011’s expectations.





Value Line notes that CAKE’s 10-year median multiple was 31x but even they don’t see that high a level for the future. They do use an 18.5 P/E in computing their 3 – 5 year target price range.


That P/E on full year projections would bring CAKE back to about $25 by year-end and to over $29 by the end of 2011. Standard and Poors sees ‘Fair Value’ right now as $26.30 /share.


Here’s a nice seven-month play that works out well even if Cheesecake goes nowhere or a tad lower from here until next January 22.






Cash Outlay


Cash Inflow


Buy 1000 Cake @ $23.83 /share


$23,830




Sell 10 Cake Jan. $22.50 calls @ $3.60 /sh.




$3,600


Sell 10 Cake Jan. $22.50 puts @ $2.20 /sh.




$2,200


Net Cash Out-of-Pocket


$17,580







If CAKE shares merely remain above $22.50 on Jan. 22, 2011:


· The calls will be exercised and the puts will expire.


· You will sell your shares for $22,500.


· You will have no further option obligations.


· You’ll end up with no shares and $22,500 in cash.


$22,500 - $17,580 = $4,920 profit


$4,920/$17,580 = 27.9% cash-on-cash achieved in just 7 months on shares that:


· Went up.


· Stayed unchanged.


· Dropped by up to 5.5% to as low as $22.50/share.





Should CAKE close below $22.50 on Jan. 22, 2011:


· The calls will expire and the puts will be exercised.


· You will be forced to buy another 1000 CAKE.


· You’ll need to lay out an additional $22,500 in cash.


· Your final position will be 2000 CAKE shares.


Cost for those 2000 shares: $17,580 + $22,500 = $40,080 or $20.04 /share.


$20.04 is lower than the absolute lows for the entire 5+ year period from March of 2003 right through May of 2008. Trailing 12-month EPS {through March, 2010} are higher than they were at any time during that whole time period.





Dr. Paul Price – June 22, 2010


www.BeatingBuffett.com


Disclosure: Author is long CAKE shares and short CAKE options.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.1/5 (10 votes)

Comments

DaveinHackensack
DaveinHackensack - 4 years ago
“I was a big buyer of CAKE near the lows but sold out earlier this year when the shares approached $30.”

CAKE was also one of five restaurant stocks you recommended here on December 17, 2007. It has been the second-best performer out of the five since then:

EAT: -25.74%

RT: -23.91%

RUTH: -57.18%

DRI: +20.12%

CAKE: +8.32%

Do you still own those other four restaurant stocks? If not, at what prices did you sell them?

Dr. Paul Price
Dr. Paul Price premium member - 4 years ago
Dave,

I did like and own all of those in late 2007. They mostly went up nicely by June of that year.

After sensing oncoming doom in the summer of 2008 I went to 100% cash until just after Thanksgiving that year. That's why you won't find any write-ups from me for the period from July 2008 through November 2008. I wasn't holding anything but cash during those months. Every stock I owned from 2007 was sold by around mid-2008 so the figures you give for the restaurant stocks from the 2007 article to today are meaningless.

I bought back CAKE, CBRL and DRI in big quantities when they got really cheap and still hold all three of those for huge gains. I seem to remember you had averaged down on some of the stocks you liked in 2007 - 2008 after they got hit hard just as I did.

Ironically, the companies with the diciest prospects - RUTH, EAT, and RT would have made the most money if you picked them up near the lows when they looked like they might not make it.

RT bottomed at $0.90 and has touched $12.55 since.

RUTH troughed at $0.70 before rebounding to $6.60.

EAT got down to $3.90 and has been to $21.12 since then.

I've tried to stick to only the most solid companies due to fear of another credit crunch so I, regretably, never got back into those three. Your tracking of their prices from Dec. 2007 through today is just as meaningless as would be measuring their gains from the exact panic lows of 2009 through today.

My non-IRA was up over 140% in 2009 as I got fully invested between Thanksgiving 2008 and March 2009. I know you've been much more bearish than I was and have kept most of your powder dry or hedged.

Everyone is entitled to their own style and more than one technique can work if you stay within your discipline.

I'd be curious to know how you think my proposed trade in this article will turn out from here through the January 22, 2011 expiration date.

I enjoy reading your blogs.

Paul
Dr. Paul Price
Dr. Paul Price premium member - 4 years ago




I haven’t been posting as much here on GuruFocus lately as I am now a featured contributor on the new OptionsProfits web-site run by TheStreet.com.

All the articles there, from me and others, are unique content not to be found anywhere else.

It went live on June 14th and has great content on a daily basis for those who like to play in the options arena.

Free trials are available.

Paul

DaveinHackensack
DaveinHackensack - 4 years ago
Paul,

You still haven't mentioned at what prices you sold those stocks. Given your recent comments about stops, it would be interesting to learn whether you got stopped out of these stocks for relatively small losses or rode them down until when you liquidated your whole portfolio in the summer of 2008.

Going to cash before the worst of 2008 was your smartest investment move. It's too bad you didn't mention you were doing that at the time, after posting dozens of bullish posts during the first half of the year.

Unfortunately, I remained mostly fully invested during '08, but fortunately, I didn't sell many stocks in '09, so that ended up being a good year for me, with my largest stock position rising about 1000% off its '09 lows.

I didn't start hedging until the end of '09, and didn't start unloading most of my long stock positions until this spring. The powder I mentioned I was keeping dry in '09 was cash from a real estate sale.

It's true that some of the riskiest stocks, including some with debt-laden balance sheets, rose the highest from the March '09 lows (these were also generally the stocks that fell the most during the crash). I think you were still smart to eschew them though. Avoiding over-levered companies remains a prudent decision.

As for my opinion of CAKE, I can offer you one positive bit of anecdotal evidence: when I went to my local one to pick up a slice of low-carb cheese cake Monday night, the place was jumping. I found it surprising, given the weak economy, but it could be that people who aren't paying their mortgages have more money to spend on going out to CAKE.

I haven't looked at the company closely though. I am not looking to buy any stock right now, except as part of a pairs trade, as I am generally bearish about stocks overall right now.

Thanks for your nice words about my blog. And best of luck to you on your new venture.
PHILCIR
PHILCIR - 4 years ago
I like CAKE -- they have good food. I highly recommend their mojitos. A little expensive but a well made mojito is hard to find. Can't just walk into an old place and order up a mojito. The mojito comes to us by way of Cuba. Nothing like a mojito w/ a fine cigar. I just picked up a box of Bolivars yesterday.
DaveinHackensack
DaveinHackensack - 4 years ago
I had one of their mojitos once -- it was loaded with sugar. Most of their cocktails seem to be. But the small plates appetizers offer some tasty choices, and contrary to the name, the portions are pretty big.

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